The Empirics of Social Progress: The Interplay between Subjective Well-Being and Societal Performance

The MIT Faculty has made this article openly available. Please share how this access benefits you. Your story matters.

Citation Fehder, Daniel, Michael Porter, and Scott Stern. “The Empirics of Social Progress: The Interplay Between Subjective Well-Being and Societal Performance.” AEA Papers and Proceedings 108 (2018): 477–82.

As Published http://dx.doi.org/10.1257/PANDP.20181036

Publisher American Economic Association

Version Final published version

Citable link http://hdl.handle.net/1721.1/121082

Terms of Use Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use. AEA Papers and Proceedings 2018, 108: 477–482 https://doi.org/10.1257/pandp.20181036

The Empirics of Social Progress: The Interplay between Subjective Well-Being and Societal Performance†

By Daniel Fehder, Michael Porter, and Scott Stern*

I. The Measurement of Societal ­well-known “beyond GDP” measure, which Performance includes GDP together with two noneconomic­ factors educational attainment and life Since the development of the national expectancy( . income accounts in the 1930s, the difference The last three) decades has witnessed a prolif- between measures of national income and soci- eration of efforts to incorporate a wider range etal performance has been recognized. Kuznets of measurable factors reflecting societal per- himself cautioned that “the welfare of a nation formance, and a variety of synthetic “beyond can, therefore, scarcely be inferred from a mea- GDP” indices have been developed with surement of national income” Kuznets 1934 . varying levels of rigor and impact Fleurbaey But, despite this warning and calls( for amend)- 2009 . A subtle but important conceptual( chal- ing GDP to more accurately reflect the full lenge) underlies these efforts. On the one hand, range of societal experience, GDP itself has most attempts to develop an overall measure of become an ever more important and standard- societal performance to replace GDP acknowl- ized economic statistic for economics research edge the central role of economic prosperity and policy. in social welfare. Some version of GDP or Even though GDP remains a central eco- economic activity is thus usually included as nomic statistic, its use as a measure of national a central component of societal performance. performance has come under increasing As a result, attempts to move beyond GDP by scrutiny. Economists have paid increasing amending GDP to include noneconomic­ factors attention to the measurement and causes of end up with a statistic that incorporates and economic inequality, with a focus on income is therefore correlated by construction with( and wealth. But, beyond economic inequal- GDP. Indeed, a common critique of the Human) ity, Sen 1985 pioneered the construction Development Index is that the index masks a of measures( of) aggregate performance that lack of social advancement in many countries meaningfully incorporate ­noneconomic fac- that perform well, such as Saudi Arabia, due to tors, including health, education, safety, civil their strong economic performance. Similarly, freedoms, and environmental integrity. Sen measures that focus on a single dimension of focused on the importance of measuring human ­noneconomic performance e.g., environmen- capabilities affecting the functioning of indi- tal integrity are inherently( partial and there- viduals within a society. This work inspired fore allow )only a balkanized view. Overall, the Human Development Index, the most synthetic indices combining ­noneconomic fac- tors along with GDP are by construction con- flated with GDP, then, whiledomain-specific ­ * Fehder: Marshall School, University of Southern indicators that might be extremely informative California email: [email protected] ; Porter: Harvard Business( School email: [email protected]) ; Stern: about a particular area lack generality or the MIT Sloan and NBER email:( [email protected] . We) thank ability to make systematic contrasts other than Betsey Stevenson for very( constructive comments,) as well as with GDP itself . ( Michael Green, Amy Wares, and Tamar Epner of the Social We address these) challenges through a novel Progress Imperative for feedback and suggestions. † Go to https://doi.org/10.1257/pandp.20181036 to visit empirical approach in which we first con- the article page for additional materials and author disclo- struct a synthetic composite index, the Social sure statement s . Progress Index SPI , that focuses exclusively ( ) ( ) 477 478 AEA PAPERS AND PROCEEDINGS MAY 2018 on ­noneconomic factors.1 Building on a range to ­transitory impacts of important life events of prior work emphasizing the conditions giving such as marriage Deaton 2008 . rise to improving human capability and func- We offer new insight( into the) factors shaping tioning, SPI measures three core dimensions of SWB by considering the distinct role that SPI social progress: basic human needs, foundations has on SWB, and how the inclusion of SPI influ- of well-being, and opportunity. Each dimension ences the measured relationship between SWB is constructed using publicly available social and traditional economic measures. While SPI output measures for a wide range of countries. and its dimensions each have a univariate cor- We then examine the relationship between SPI relation with SWB, the opportunity dimension and economic performance, documenting that with the lowest correlation with GDP has the GDP per capita and SPI are correlated but dis- most( robust relationship to ­country-level) SWB. tinct. But, while basic human needs is highly Within countries, the relationship between correlated with GDP per capita, opportunity has social progress and ­well-being is stronger for a noisier relationship. individuals at lower levels of income and educa- We then extend the analysis by considering tional attainment. Together the results highlight the interplay between SPI, GDP per capita, and the joint role of traditional economic measures a more holistic measure of subjective well-being­ and ­noneconomic dimensions in shaping SWB. SWB, i.e., happiness or life satisfaction . Though exploratory, the measurement and Economists( have long sought to clarify the) analysis of a social progress index highlights conceptual and empirical relationship between the potential importance of accounting for the traditional economic measures, such as GDP ­two-way interaction between economic funda- and personal income, and SWB. The Easterlin mentals and social institutions in shaping overall Paradox 1974 highlighted the empirical pos- societal performance. sibility that( while) SWB was increasing in rel- ative income within a country, the relationship II. Constructing a Social Progress Index2 between country-level­ GDP per capita and aver- age country-level­ SWB might be positive only The novelty of our analysis results from the up to a threshold level of economic develop- use of a social progress index that excludes fac- ment. The Easterlin Paradox was not simply an tors directly incorporated into the traditional empirical puzzle: the absence of a relationship economic measurement of GDP. As empha- between GDP and life satisfaction would pose sized by, among others, Nardo et al. 2005 a challenge to the often implicit Benthamite and Fleurbaey and Blanchet 2013 , synthetic( ) utilitarian assumptions( undergirding) a consider- index construction is inherently( problematic,) able body of applied economic analysis. with a wide scope for theoretical or empiri- Over the last several years, a systematic cal alternatives with equal claim of a potential body of rigorous empirical evidence has clari- relationship or lack of relationship to social fied that debate: Stevenson and Wolfers 2013 welfare. Importantly,( one of the strengths) of document a robust positive association between( ) GDP as an economic statistic is that, despite its SWB and the absolute level of income, within other limitations, its construction is disciplined countries, across countries, and across time. through the use of prices as relative weights However, the explanatory power of GDP and which are themselves determined through the personal income on SWB is modest, compared( revealed preference choices of consumers and ) firms.3 Measures that directly seek to integrate ­noneconomic dimensions into GDP such as the Human Development Index inherently( combine 1 The Social Progress Index was developed by the authors a GDP component weighted) by price with other in collaboration with the Social Progress Imperative. Two authors Porter and Stern serve on the Advisory Board. See www.socialprogressimperative.org( ) for detailed background and policy objectives discussion of the Social Progress 2 This section draws on earlier discussions in Porter, Imperative, and the construction of the Social Progress Stern, and Green 2017 and Stern, Wares, and Epner 2017 . Index. From inception, the Social Progress Imperative has 3 This discussion( abstracts) away from the challenges( of) focused on developing a synthetic ­noneconomic social prog- the measurement of traditional economic activity, and con- ress index to exist alongside GDP and traditional metrics to structing GDP in a consistent way across time and space assess overall societal performance. among many others, Fleurbaey and Blanchet 2013 . ( ) VOL. 108 THE EMPIRICS OF SOCIAL PROGRESS 479 factors, and so must ­inevitably implicitly if not ­noneconomic conditions that a society provides explicitly specify the ways in( which compo- e.g., achieving a high level of sanitation, shel- nents that) are not easily measured through prices ter,( and personal safety , FOW asks if a society e.g., environmental or health quality influence offers individuals an opportunity) to invest in the( relative weight assigned to GDP itself.) themselves and their communities to advance Rather than conflating the role of economic their well-being e.g., allowing individuals to and noneconomic­ factors in a single index, we achieve a basic level( of education, gain access propose an alternative index to exist along- to information, and maintain lifelong health and side GDP in assessing societal performance. local environmental quality . Finally, oppor- Separating GDP from ­noneconomic social tunity focuses on those components) of social progress does not by itself overcome the inher- progress that affect the ability of individuals to ent challenges of calculating a composite index achieve their own personal objectives, including such as selection of potential components and their degree of personal rights and freedom in determination of their relative weights Nardo the context of an inclusive society with higher et al. 2005 . But, by focusing specifically( on educational opportunities. social progress,) we aim to address these issues Each of the three dimensions of SPI are directly without explicit reference to the welfare divided into four components suggested by contribution or relative role of GDP itself. As a the literature. Each component is based on an result, we can focus on developing a consistent aggregation of three to fivepublicly-available ­ and robust index of social progress outputs to indicators which are determined using a trans- examine the role of social progress in overall parent and consistent methodology across a societal performance. wide range of countries the Index includes a Our analysis utilizes the Social Progress total of 50 measures . Each( measure is scaled Index, first developed by the authors in con- from zero to 100, ranging) from zero for the junction with the Social Progress Imperative. worst possible performance and 100 for maxi- Synthesizing a rich multidisciplinary literature mal performance feasibly achievable by a soci- following Sen 1985 , including critical contri- ety either on an absolute basis or as achieved butions such as (Stiglitz,) Sen, and Fitoussi 2010 by the( best-performing­ country in any year since and Fleurbaey 2009 , the Index is premised( on) 2004 . Principal components analysis is used a holistic yet concrete( ) definition for social prog- to develop) weights for each measure within the ress amenable to measurement: social progress components to ensure adequate balance among is the capacity of a society to meet the basic measures and avoid overweighting measures human needs of its citizens, establish the build- that are themselves highly correlated with each ing blocks that allow citizens and communities other. To calculate the dimension and overall to enhance and sustain the quality of their lives, SPI score, each component is weighted equally and create the conditions for all individuals within dimension, and each dimension is to reach their full potential. To translate this weighted equally in the calculation of the overall definition into a concrete measurement tool, SPI. The average of SPI for 2014 is 66.27, with a the index aggregates social and environmen- range from 30.32 Central African Republic to tal output-oriented­ measures available across a 90.02 the Netherlands( . ) wide range of countries or regions with a high ( ) level of consistency and specificity. III. Social Progress, GDP, and Subjective SPI is based on a framework in which over- ­Well-Being all social progress is decomposed into three distinct dimensions, basic human needs BHN, SPI aims to incorporate a broad array of “Does a country provide for its people’s( most dimensions of societal performance not directly essential needs?” , foundations of well-being captured by traditional economic metrics such FOW, “Are the )building blocks in place for as GDP. A major objective is first to offer individuals( and communities to enhance and insights into differences in ­noneconomic socie- sustain well-being?” , and opportunity “Is there tal performance across countries and over time opportunity for all )individuals to reach( their as a foundation for benchmarking and under- full potential?” see the online Appendix for standing what leads to effective policy. For further description) ( . Whereas BHN centers on example, Northern European countries show ) 480 AEA PAPERS AND PROCEEDINGS MAY 2018 strength in areas such as FOW while the United States registers strong performance in the area of opportunity relative to the other two dimen- sions. Beyond comparisons of social progress dimensions, however, SPI offers a novel tool for assessing the interplay between social indica- tors, traditional economic metrics such as GDP per capita, and more holistic measures of human fulfillment such as SWB. SPI, then, incorporates the ­noneconomic factors that are needed in any “beyond GDP” statistic, and thus offers a way to evaluate the relationship between these dimen- inde Social progress orrelation = sions and GDP itself. Figure 1 documents the relationship between GDP and SPI for 52 countries for which we also have SWB data.4 Notable differences exist for some country groupings relative to others. Scandinavia tends to perform more strongly on SPI relative to measured GDP per capita, while ­resource-dependent economies realize a low P per capita PPP level of SPI relative to their economic output. Figure 1. Relationship between GDP per Capita and In terms of the relationship between GDP per SPI capita and the three dimensions of SPI, there is a tight connection between GDP per capita and BHN a dimension that covers many aspects of social (progress that have been the focus of the positive and significant raising the question development literature , a flatter relationship of the joint interplay between economic and between GDP per capita) and FOW, and a noisier ­noneconomic societal performance and SWB. relationship between GDP per capita and oppor- Table 1 reports three regressions including tunity. The dimensions of SPI most closely GDP per capita and measures of social prog- related to public investment and infrastructure ress. Model 1-1­ first includes GDP per capita are more closely connected to GDP per capita and SPI together. Both are positively associ- than those related to individual choice and social ated with SWB; while neither is statistically norms. significant, together they are jointly significant These distinctions between GDP per capita, F 9.56 . Given the baseline correlation and SPI and its dimensions, motivate an analysis between( = GDP) and SPI, we cannot separately of how these social and economic performance disentangle the individual impact on SWB. metrics relate to average SWB as measured Model 1-2­ furthers this investigation by consid- by World Values Survey Wave 6,( covering 52 ering the impact of each dimension of SPI con- countries between ­2012–2014 .5 In the online trolling for GDP. Interestingly, the dimension of Appendix, we report the univariate) correla- SPI least correlated with GDP, opportunity, has tion between subjective well-being­ and the log a statistically significant relationship with SWB. of GDP per capita, as well as SPI and each of Put together, these exploratory findings suggest its dimensions. Each of these correlations are the utility of separating GDP and SPI and its dimensions ; similar to GDP, SPI has a( strong univariate relationship) to SWB, but the bivari- 4 Our broad findings persist if we examine instead GNI ate correlation between GDP and SPI does not excluding foreign income , or control for income inequal- allow for separate cross-sectional­ identification ity.( The online Appendix illustrates) the empirical relation- of each on average SWB. ship between SPI and its dimensions and GDP per capita. In the online Appendix, we extend this analy- 5 Our analysis focuses on item V23 from the WVS, a commonly used SWB metric used from this survey. The sis to focus on the interplay between individual results are robust to alternative SWB measures such as those attributes and social progress. Briefly, we utilize from the Gallup Survey. the detailed individual data available from the VOL. 108 THE EMPIRICS OF SOCIAL PROGRESS 481

Table 1—The Relationship between Life Satisfaction That social progress and economic development­ and SPI, and by Dimension are correlated is a positive and important Life Life Life ­finding. Of equal interest is the important link- satisfaction satisfaction satisfaction ages between these two concepts, both across 1 2 3 countries and across different dimensions of ( ) ( ) ( ) social progress. An important finding is that Logged GDP 0.183 0.222 0.038 per capita 0.166 0.168 0.108 the dimension of social progress least cor- ( ) ( ) ( ) SPI 0.012 related with GDP, opportunity, exhibits the 0.015 most robust positive relationship with SWB. ( ) Basic human 0.012 Understanding social progress across multiple needs −0.020 dimensions can enhance understanding of the ( ) Foundations of 0.023 factors shaping economic performance, and the well-being −0.030 reverse. Our analysis suggests the potential for ( ) Opportunity 0.031 0.023 a constructive empirical agenda exploring the 0.012 0.008 ( ) ( ) ­two-way relationship between economic and Constant 4.392 5.822 5.229 ­noneconomic factors in shaping aggregate soci- 0.754 1.064 0.736 ( ) ( ) ( ) etal performance. Observations 52 52 52 2 R 0.182 0.274 0.238 REFERENCES Notes: These are linear regression models at the country level. Robust standard errors in parentheses. Deaton, Angus. 2008. “Income, Health, and Well-Being around the World: Evidence from the Gallup World Poll.” Journal of Economic Perspectives 22 2 : 53–72. World Values Survey to consider a regression Easterlin, Richard A.( )1974. “Does Human Growth where we include ­country-level fixed effects and Improve the Human Lot? Some Empirical Evi- focus on the interaction between SPI and rela- dence.” In Nations and Households in Eco- tive income, educational attainment, and gender. nomic Growth, edited by Paul A. David and After controlling for country-level­ fixed effects Melvin W. Reder, 89–125. New York: Aca- and interaction terms between GDP per capita demic Press. and individual attributes, our results suggest that Fleurbaey, Marc. 2009. “Beyond GDP: The Quest the relationship between SPI and SWB is more for a Measure of Social Welfare.” Journal of important at lower levels of relative income and Economic Literature 47 4 : 1029–75. educational attainment. Fleurbaey, Marc, and Didier( ) Blanchet. 2013. “Beyond GDP: Measuring Welfare and Assess- IV. Concluding Thoughts ing Sustainability.” New York: Oxford Univer- sity Press. Most discussions in economics and policy Kuznets, Simon. 1934. “National Income, 1929– have treated the role of social conditions and the 1932.” In National Income, 1929–1932, edited provision of effective noneconomic­ social insti- by Simon Kuznets, 1–12. National Bureau of tutions e.g., those that allow for a greater level Economic Research. of personal( freedom as potentially important Nardo, Michela, Michaela Saisana, Andrea Salt- but difficult to integrate) into a traditional eco- elli, Stefano Tarantola, Anders Hoffman, and nomic measurement framework. The role of Enrico Giovannini. 2005. Handbook on Con- ­noneconomic factors in shaping well-being has structing Composite Indicators: Methodology often been treated as a confounding influence and User Guide. Paris: Organisation for Eco- rather than as a direct area of study, despite the nomic Development. fact that individual life circumstances play an Porter, Michael E., Scott Stern, and Michael important role in shaping well-being. Green. 2017. Social Progress Index 2017. Our goal has been to reorient analysis toward Washington, DC: Social Progress Imperative. the dual role of economic and noneconomic­ Sen, Amartya. 1985. Commodities and Capabili- dimensions in shaping overall societal progress. ties. Amsterdam: North-Holland. 482 AEA PAPERS AND PROCEEDINGS MAY 2018

Stern, Scott, Amy Wares, and Tamar Epner. Review 103 3 : 598–604. 2017. Social Progress Index 2017: Methodol- Stiglitz, Joseph( E.,) Amartya Sen, and Jean-Paul ogy Report. Washington, DC: Social Progress Fitoussi. 2010. Report by the Commission on Imperative. the Measurement of Economic Performance Stevenson, Betsey, and Justin Wolfers. 2013. “Sub- and Social Progress. Paris: Commission on the jective Well-Being and Income: Is There Any Measurement of Economic Performance and Evidence of Satiation?” American ­Economic Social Progress.